Taxing Definitions

Definition — Abandonment

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Image source: Nicholas A. Tonelli, via Wikimedia Commons
Image source: Nicholas A. Tonelli, via Wikimedia Commons

What does it mean to abandon property? For federal tax purposes, when you abandon an asset you can generally take a loss to the extent that your adjusted basis is more than the amount you realize.

In English: Your adjusted basis is what you paid for the asset plus later improvements less adjustments such as depreciation. Since you typically receive nothing when you abandon property, your outlay is generally greater than the amount you receive, and you have a loss that you can deduct on your return.

Do you know the to claim an abandonment loss? What are necessary to claim a loss for tangible property?

In T.C. Summary Opinion 2014-6 (Chen), the taxpayer planned to develop 88 acres of land in New York, and claimed expenses related to the development project on his 2009 federal income tax return. The IRS said the taxpayer was not in a trade or business and could not take the deduction.

The court agreed with the IRS, saying the development activities were still in the planning and exploratory phase and did not rise to the level of a trade or business. The court said expenditures relating to the property were not currently deductible in 2009—unless the development project was completely abandoned in that year.

The taxpayer testified to completely abandoning the project due to a severe decline in the housing market and a change in wetland laws applicable to the property. However, the taxpayer continued to seek approval for preliminary plans, and intended to submit applications for reviews of proposed septic systems and wells.

No real intent to abandon equals no abandonment loss deduction. Disregarding the rules equals an accuracy related penalty.

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You have to intend to abandon an asset, then actually follow through.
In general, for tangible property, you must permanently discard an asset whose usefulness is suddenly terminated, and the asset must no longer be useful in your business. You are not, however, required to be an “incorrigible optimist.” (See United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927))
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